Budget talks in the European Union are a game of 27-dimensional chess. Members play simultaneously against one another, negotiating over many spending items at any one time. Countries are already preparing for the contest that starts next year, which is likely to be particularly dramatic. The world around the EU has shifted, owing to the war in Ukraine, the continent’s increasingly difficult relationship with China and the growing urgency of climate change. That necessitates what Mario Draghi, a former president of the European Central Bank and prime minister of Italy, has called “radical change”. Yet the bloc’s biggest contributors, including Germany and the Netherlands, will be reluctant to stump up more cash. New outgoings for climate change and defence will have to be funded by cuts elsewhere.
Where will the money come from? The EU’s two biggest pots are set aside for agricultural subsidies and regional redistribution. The first received €380bn ($410bn) over the last seven-year cycle, or a third of the EU’s regular budget. The redistribution pot got €390bn. Both are seen as foundational to the European project. Agricultural pay-outs are meant to support the continent’s rural economy, compensating farmers for its relative openness to trade, without which they could charge higher prices. Regional development funds are intended to complement the EU’s single market, which benefits regions with successful clusters of firms. The desire, as Jacques Delors, a former president of the European Commission, once put it, is “a Europe built on competition that stimulates, co-operation that strengthens and solidarity that unites”.
The time has come to rethink such ideas. At first glance, it may seem harsh to change policies that benefit Europe’s farmers and poor. Yet appearances can be deceiving. In reality, the true beneficiaries of the EU’s largesse are rather less deserving.
Start with agricultural subsidies. Economists have long understood that handouts to farmers end up with landowners. As this newspaper wrote in 1843 regarding the protectionist Corn Laws: “While they are highly injurious to the manufacturing and commercial classes, [they also do not] benefit the farmers nor the agricultural labourers…The only class that can derive benefit from them (if they can benefit anyone) is the landed proprietors.” This is because land is a crucial input for agricultural production and, unlike fertiliser or tractors, more of it cannot easily be produced. If agriculture becomes more profitable because of subsidies, farmers will therefore respond by bidding up land’s price.
A recent paper by Edoardo Baldoni and Pavel Ciaian of the Joint Research Centre, part of the European Commission, puts some numbers on this. The authors find that more than a fifth of European agricultural subsidies end up with landowners. The figure would be higher still if European land markets were more competitive. In areas with few large farms, owners of small plots struggle to find alternative tenants, lowering rental rates. Farmers often also collude to ensure that land rates stay low: it is poor form to pay more to kick your neighbour off his land. Nevertheless, takings by landowners may rise in years to come, even if their share of handouts does not. That is because the value of land is likely to increase owing to new green handouts. In the 2000s Germany subsidised electricity from biogas. Later research found that landowners in areas with lots of cattle were able to increase the rental price of land by €60-140 a hectare. Some of today’s support for solar energy may end up in landowners’ pockets, too.
It is a similar story with regional development funds. The idea behind them is straightforward. Funnelling cash to poorer parts of the EU, for infrastructure, innovation and the like, should help their economies develop and thus help reduce inequality. Yet a new paper points out this is not what happens. Valentin Lang of the University of Mannheim, Nils Redeker of the Delors Centre Berlin, a think-tank, and Daniel Bischof of the University of Münster find that regions, as defined by the EU’s scheme, are too large and diverse to sensibly guide funding. The authors combine household survey data from various European countries, covering the period from 1989 to 2017, and find that inequality within EU regions is much more significant than divisions between EU regions. Funds would be better spent if they targeted poorer places and households within these regions.
More damning still, the EU’s regional policies provide greater benefits to rich households in poor regions than to their least well-off peers. To isolate the policies’ effects, the researchers compare regions that just met the eligibility threshold with those that narrowly missed out. They also look at EU enlargement, which suddenly lowered the EU’s average GDP per person—against which poorer, deserving regions are measured. Like other studies, they find that the funding does boost regional growth. But drilling down into the household survey, they also find that spending does very little for poorer households within a region, even as richer households make hay. Indeed, people in the top 40% of the income distribution see annual incomes grow two to four percentage points faster. The reason for this, Messrs Lang, Redeker and Bischof discover, is that handouts tend to support higher-skilled jobs, since they end up funding projects involving larger, more technical firms. By helping the rich in poorer regions, convergence funds end up making within-region inequality worse.
French defence
Any attempt to mess with agricultural or regional handouts will meet howls of indignation and possibly worse: farmer protests involving spilled milk or dumped manure. Both schemes have numerous beneficiaries. They are also seen to capture something of the essence of the EU. But the world is changing. And so must the bloc. It is time for a bold gambit.
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